3 Winded Tech Stocks to Short

Advertisement

Even though the market correction struck quickly, there’s still plenty of downside left, which means plenty of stocks to short. After all, whenever there is a jump in volatility, investors tend to shy away from the high-fliers, especially in the tech stock. And given that corrections can last for months, there are lots of opportunities to make some upside from stocks’ downside.

arrows earnings seasonNow for those investors who are not familiar with short selling, the technique can seem a bit strange: It allows you to make money when the value of a stock falls. The actual process involves borrowing shares and selling them immediately. Later, after the stock drops, you buy the shares back (known as “covering” the position).

If all goes well, the difference between prices results in a nice profit for the short seller.

However, there are risks with short selling. If the stock moves up instead of down, the short seller still has to pay the difference — meaning you actually lose money in the process. In fact, if the price more than doubles, you can lose more than 100% of your money.

And unexpected good news can cause a “short squeeze,” which is when short sellers scramble to cover their positions (that is, buy back the stock) before it goes up even higher.

In other words, when it comes to short selling, it is a good idea to keep short positions a small part of your portfolio, say under 5% or so. With that in mind, we’ve put together a list of three that look interesting.

Stocks to Short: Workday (WDAY)

Workday NYSE:WDAYWorkday (WDAY) is a leading cloud-based operator of ERP (enterprise resource planning services) applications, which help with HR, financials, inventory and so on.

Yet investors are getting antsy with the company. Since late May, WDAY stock has dropped about 23% as the company hit a deceleration in its growth ramp. While WDAY saw a 51% jump in revenues in the latest quarter, it was still below fiscal 2015’s 68%.

It’s true that, as the company gets larger, revenue growth will naturally slow. But there may be some other factors at work. First of all, rivals like Oracle (ORCL) and SAP (SAP) are getting much more aggressive with pricing. At the same time, there may be more trepidation from customers to commit to the substantial investments of an ERP implementation as the global economy begins to slow down.

Interestingly enough, WDAY is already indicating that Q3 billing will underperform, with a forecast of $310 million to $315 million. The Street, on the other hand, was looking for a much more robust $336.8 million. Keep in mind that Q3 and Q4 are generally the strongest quarters for WDAY because this period is when customers often make purchasing decisions for software.

And even with the drop in WDAY stock, the valuation is still not cheap. Workday’s current price-to-sales ratio is a hefty 13.8. In comparison, competitor Salesforce.com (CRM) sports a multiple of only 7.5.

With that many headwinds, Workday makes an easy candidate for our list of stocks to short.

Stocks to Short: Box (BOX)

box inc-box-stock-185Life as a public company has not been kind to Box (BOX), the cloud-based provider of collaboration and storage services. The company pulled off its offering back in January at $14 per share. However, Box’s stock price has fallen from a high of $24.73 to a measly $12.86.

There are really two big problems with the company: The losses remain large, and growth is quickly decelerating. No doubt, that’s a deadly combination for a stock that only just hit the market!

In the latest quarter, revenues increased by 45% to $65.6 million and the net loss came to $47.3 million. But while that 45% growth seems impressive, it’s actually down remarkably from the 74% growth BOX saw a year ago. Worse, Box’s revenue growth is slowing despite spending more than 80% of its revenues on sales and marketing.

And the slowdown is likely to continue. For the most part, Box must deal with intense competition from rivals like Amazon (AMZN), Microsoft (MSFT) and Google (GOOG, GOOGL). These companies can sell storage at dirt-cheap prices since they can rely on other sources of revenues. The result is a terrible squeeze for BOX.

As for Wall Street, the short sellers are still looking for big gains. A whopping 40% of the float of BOX is in short positions.

Stocks to Short: GrubHub (GRUB)

GrubHub185GrubHub (GRUB) operates an online and mobile platform that allows for restaurant pick-up and delivery orders. The company’s network includes more than 35,000 local restaurants across more than 900 cities in the U.S.

So far, growth has been strong. In the latest quarter, revenues zoomed up 47% to $88 million, leading to $9.4 million in net income.

But the good times may not last long, which is why GRUB is one of the most attractive stocks to short right now. In fact, about 22% of the float is already held short.

So, why the skepticism? Well, the competition is getting downright scary. With huge amounts of venture capital sloshing around the market, we’ve seen a plethora of food-delivery startups like Sprig, Munchery, DoorDash, Caviar, Blue Apron and Postmates.

But traditional online operators are also jumping into the arena. One is Yelp (YELP), which recently purchased Eat24 for $134 million. And yes, Amazon is edging into this battlefield, too. The company is testing its own food delivery service in Seattle and it looks like it will become part of the highly popular Prime service.

Then there’s ride-sharing company Uber, which has added a food-delivery option on its app. And given Uber’s massive infrastructure and cash resources, the move is likely to be much more pressure on GRUB.

GRUB stock price is still pricey, with a price-to-sales ratio of 7.3. Yelp, on the other hand, is trading at about 3.9. So even the slightest bit of bad news could send GRUB stock lower, providing profits to short sellers.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/tech-stocks-to-short/.

©2024 InvestorPlace Media, LLC